Positive Sign for Investors: Time to Liquidity Gets Shorter by Bill Clark | Monday, December 13, 2010
There's a lot of excitement in making a funding deal. It's easy to get caught up in the moment. Consider the massive potential! The ground-floor opportunity!
But ultimately, private investors put their precious dollars into startup companies for one reason: to make a good profit. That means that someday – preferably in the not-too-distant future – the company either goes public, gets sold, or buys them out at a nice return.
The faster investors can reap their profits, the more money they truly make. The good news is, despite the constipated IPO markets, time to liquidity has still been getting shorter.
A report from research firm Dow Jones VentureSource, the average time to liquidity sank last year to five years, the shortest timeframe since 2004, when it was 4.6 years. In 2007, it was 6.3 years.
Of course, that data doesn't tell us if these exits were more or less profitable than exits in the past. It could be that some investors are just ready to cut their losses on bad investments and sell companies off, so they can get their money back in circulation in a deal with more potential. Also, the data is bumpy because giant deals tend to skew the numbers.
For instance, the acquisition market was about $213 billion in the first quarter this year, which is down from last year's first quarter. But that year-ago period had two huge pharma deals in it – Pfizer-Wyeth merger for $68 billion and Merck & Co's $41 billion spent for Schering-Plough. Those aside, things look smoother.
Still, M&A observers are heartened by two big going-private deals that went down in the past year. Bain Capital bought Skillsoft for $1.1 billion and Millipore was bought by Merck for $7.2 billion.
The private-equity acquisition frenzy is expected to build in the next few quarters. As the recovery takes hold and stock values recover, valuations of public companies will go up, so many private-equity firms are trying to act now while values are low.
What happens at the big-company level on exits tends to be mirrored in the startup arena, so likely there's a lot of small funding rounds of seed money going into startups right now. But one thing's clear – in today's fast-changing world, investors want to turn their money faster. MicroVenture's typical investment contract is for five years, so we're focused on helping investors move rapidly from term sheet to a successful exit.
